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'Say what you mean and mean what you say'

‘Say what you mean and mean what you say’ (Thanks to Lewis Carroll and the March Hare) – article by Christine Oxenburgh, Dispute Resolution Partner

Most of the cases I do that come from Sale and Purchase Agreements centre around breaches of warranty and indemnity claims. A case recently went all the way to the Supreme Court to consider what the indemnity meant and therefore whether the buyer had a claim or not.

Indemnity

An indemnity is an obligation to pay the other party the losses arising from a trigger event. There are some fairly standard wordings for indemnities but they are not all the same and they should be drafted to suit the needs of the parties. They are often hotly negotiated before agreement is reached.

The Case

I need to tell you a bit about the facts for this to make sense. It is a reported case so I am shameless about giving the names. Mr Wood sold his insurance business to Capita. The indemnity clause entitled Capita to be indemnified for

“All actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by Wood’s company following arising out of claims or complaints registered with the FSA or other regulator against Wood’s company…”

I have highlighted the key words.

There was also a warranty that the company had conducted its business in accordance with “all applicable financial services laws” and had no reason to believe any action would be taken against it.

After the sale, some employees of Wood’s company decided that there had been some mis-selling and so the company reported itself to the FSA. The FSA said customers had been treated unfairly and ordered redress to be paid so Capita made a claim under the indemnity. The warranty was not really a big issue because it was not seriously said that Mr Wood knew about the mis-selling before completion of the sale.

Mr Wood said he was only liable if a claim or complaint was made, not a self-report. Mr Wood lost first time around, but won in the Court of Appeal and then again in the Supreme Court.

What words mean

There are some rules of interpretation that I often have to deal with when I am advising clients that are a bit technical.

It is assumed that everything in a contract has a meaning;

language should be read in accordance with common sense;

if there is more than one interpretation the court should choose the one most consistent with common business sense;

the court should not reject the natural meaning just because it would mean that one party has made a bad bargain

So what the court had to balance was:

the fact that Capita said that it had wanted the ability to claw back any money paid out for “sins” pre-completion; and

the fact that the only thing the agreement said it was entitled to be compensated for was payment arising from a claim or complaint.

What the Court of Appeal said (well it said quite a lot, I am cherry picking so that this article is not too academic) is that the court has to find out the objective meaning of the language considering the contract as a whole and looking for the interpretation that is most consistent with common business sense. Capita lost. It was confined to the narrow meaning. Self-reports did not count.

It seems to me that the person who drafted this clause might be feeling rather nervous right now if it was clear that what Capita intended was what it argued for in the proceedings namely the right to claim any payments to its clients for the reasons in the indemnity clause.

However, putting yourself in a position where you can claim from a lawyer for a badly drafted contract is not really in a business’s best interest. Good for my business, not for yours. It would be better for the agreement to say what the parties intend and for everybody just to get on with their day jobs. The cost of this action must have been huge and the strain on the parties just plain bad for business.

The Moral

Be clear on what you want to achieve when you are doing a deal and make sure all your professional team understand your wishes.

Ask if you have got what you want.

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